RMA Provides Vision on How Banks Can Aid Small-Dollar Borrowers

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The Risk Management
Association (RMA) outlines how banks can play an important role in fulfilling
the needs of small-dollar borrowers in a comment letter filed this week with
the Federal Deposit Insurance Corporation (FDIC).

The letter suggests that
more bank activity in the sector would greatly benefit customers who currently
rely on payday lenders for their short-term cash needs. RMA, a financial
industry association that promotes sound risk management principles, notes that
the interest rates charged by a leading payday lender range from 22.2% to
46.1%.

Banks have largely
retreated from small-dollar lending because of the difficulty of covering
administrative costs, concerns about customers’ credit history and scores, and
uncertainty surrounding regulation.

The letter, which was
filed in response to the FDIC’s Request for Information on Small-Dollar
Lending, states that smaller banks in particular do not have the expertise and
resources to participate in small-dollar lending “unless they build a portfolio
of sufficient size.”

RMA suggests several
ways banks can increase small-dollar lending in a safe and sound manner,
including:

Requiring
borrowers to open direct deposit accounts.

Ensuring
staff has the proper expertise to manage small-dollar portfolios.

Increasing
reserve levels.

To be confident about
taking such a course, the letter says, banks need clearer, all-inclusive
interagency guidance from the federal bank regulatory agencies addressing “the
current supervisory expectations for these types of programs.”

About RMA Founded in 1914, The Risk Management Association is a
not-for-profit, member-driven professional association whose sole purpose is to
advance the use of sound risk management principles in the financial services
industry. RMA promotes an enterprise approach to risk management that focuses
on credit risk, market risk and operational risk. Headquartered in
Philadelphia, Pennsylvania, RMA has 2,500 institutional members that include
banks of all sizes as well as nonbank financial institutions. They are represented
in the Association by 18,000 individuals located throughout North America,
Europe, Australia and Asia/Pacific.